Ronald Reagan’s theory held that lowering taxes on upper income folks would spur investment and increase opportunities for everyone and that the benefit of tax reductions would “trickle down” to the middle class.
The answer to whether any economic theory works is always, “it depends,” and Reagan’s is no exception. Though a definitive answer to the question may elude us, some statistics could be helpful in drawing reasonable conclusions. Rather than perform independent research, I have relied heavily on a column by Robert J. Samuelson entitled “Trickle-Up Economics?” that appeared in the October 2, 2006, issue of Newsweek magazine.
In many ways, our standard of living has gone up since the Reagan tax cuts of the early-1980s. The lower income folks (poorest 10% of Americans) have more microwave ovens, VCRs and computers, none of which are necessities and indicate discretionary funds. Plus, from 1995 to 2005, median household income rose 10.5%. Not a spectacular gain, but a gain nonetheless.
On the negative side, fewer people have health insurance coverage and the situation is getting worse all the time. Employers are retreating from the financial burden of employee health insurance coverage by either canceling coverage or requiring larger co-pays by employees. And, at the same time, healthcare costs are increasing much faster than the rate of overall inflation.
The jury is still out on the impact of globalization on middle-class America. On the one hand, hundreds of manufacturing and many service jobs have been outsourced to other countries, leaving skilled and semi-skilled workers with no option but to take a lower paying job. On the other hand, these same folks are buying foreign-made goods at Wal-Mart at prices much lower than they would pay for American-made products. Globalization is not an option, however, it is the new reality that we must adjust to and make the best of.
Moving from the middle-income group to the financial titans, their share of the economic pie is getting larger and larger. In 1980, the richest 5% of Americans received 16.5% of the income. By 2005, that percentage had increased to 22.2.
Further, in 1980 the richest 1% of Americans received about 10 times the income earned by an average household. For 2003, that multiple had increased to 20 times the average household income.
Corporate profits have been skyrocketing, enjoying a 21% increase for 2005. In a report appearing about a year ago, Market Watch said, “Profits have been so high because almost all of the benefits from productivity improvements are flowing to the owners of capital rather than to the workers.” So much for “trickle-down economics,” at least in Market Watch’s view.
My sense of the situation is that the American economy is experiencing a period of transition and is plagued with uncertainty as we adjust to the impact of globalization. Workers are anxious about their jobs and don’t feel comfortable pushing for pay increases. Technology has vastly improved productivity and the financial rewards of that increase has been passed on to executives and shareholders.
What does the future hold? Change, for sure, but beyond that is anyone’s guess. Over time, the American workforce will adjust to the new playing field and re-assert itself. Our free market economy is very adaptable. To be successful, workers must take more personal responsibility for their careers, however modest, and continually improve their skills. As the value of those skills rises they will command a bigger piece of the economic pie.
But first, we’ve got to rid ourselves of complacency and get serious about upgrading skills. Next, we’ve got to abandon our sense of entitlement to a higher standard of living than that enjoyed in other countries merely because we’re Americans and they’re not. This is a new game and the cards have been re-dealt.
Thought for the Moment
When in doubt, tell the truth.
— Mark Twain (1835-1910)
Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at email@example.com.